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Creating
Wealth in the Weightless Economy
Since 1900, and likely from long before, between 60 and 90 percent of
the growth in output per worker in the advanced economies has been due
to technical progress. Wealth creation has arisen, not from accumulating
traditional physical capital, but from advances in the effectiveness and
productivity of capital and labour inputs. Professor Danny Quah (London
School of Economics and CEPR) argued, at a lunchtime meeting organized
by CEPR and SNS
on 29 September, that technological progress is now, and likely always
has been, the single most important factor underlying continued advances
in economic wellbeing in the richer countries. This remains true both at
the national level and at the individual level.
Over the last two decades the greatest, most rapid, and most visible
technical progress has occurred in that part of the economy which can be
referred to as the ‘weightless economy'. This can be defined as a
combination of information and communications technology (ICT),
intellectual property – embedded in, among others, pharmaceutical
products, electronic libraries, databases, and digital media.
(Sometimes, one might include in this list other elements of the
‘creative’ sectors of the economy, although whether it is
insightful, useful, or correct to do so, depends).
The rate of technical advance in the weightless economy dwarfs
anything that had preceded it – including, significantly, the
Industrial Revolution of the late 18th century, or the technical
consolidations of the 19th century or early 20th century. The defining
feature of the weightless economy is not just the high concentration of
knowledge in the goods produced, but, more important, in the way
weightless economy products themselves behave like knowledge. To a first
approximation those products show infinite expansibility and inherent
unknowability.
- Infinite expansibility is when further use of a product does not
draw down its original usefulness to other consumers. Computer
software displays this; scientific knowledge displays this;
electronic database and digital media content displays this.
- Inherent unknowability is when the value of a product in use or
consumption is uncertain, when consumers need to grow in
sophistication to fully exploit a product. Computer software,
scientific knowledge, and digital content, again, all increase in
usefulness as users raise, correspondingly, their levels of
sophistication – either through learning by doing on one's own or
learning from one another in networks.
Education, in this broad interpretation, supports the demand side of
the weightless economy, not just its supply side.
To succeed, continued wealth creation and economic progress –
whether at the individual, national, or global level – has to
acknowledge the increasing importance of the weightless economy and to
exploit its peculiar properties. Marginal cost can be close to zero,
thereby making conventional economic behaviour to price at marginal cost
in equilibrium no longer feasible. However, market structures that
support viable alternatives paradoxically deliver inherent social
inefficiencies when they do work. Technical leaders can grow to be
market successes, and incur unjustified popular criticism. Successes in
the weightless economy do not derive from an inherited or established
position. And they don't remain leaders for long without continually
re-inventing their successes. Societies need to understand and to debate
this trade-off between dynamic incentives and social inefficiency.
Centralisation does not provide the answer, and examples from history
illustrate the dangers of expecting it to encourage and promote
technical progress. Despite an Industrial Revolution in 17th-century
China waiting to happen, with all technological ingredients in place,
that economy failed to take off. A bureaucratic state shut off growth in
demand and use of the new technology – paper and printing, mechanical
and hydraulic power, chemical advances – and ended up stifling
economic development. While economically and technologically ahead in
1400, China by 1900 was well behind the fast-growing
industrially-advancing Western economies. Uncomprehending bureaucrats,
fearful of the subversion of their authority, allowed their technical
edge to wither away, and snatched disaster from the jaws of an economic
miracle.
The weightless economy therefore brings opportunities and pitfalls.
There is the possibility of ongoing, unconstrained economic growth; no
natural bound is apparent. There is the possibility of a dramatic
concentration of wealth and economic power. But at the same time, in
well-functioning markets there can be mobility: whoever is on top does
not always have to remain there. Finally, there are infinite
possibilities for national and social policy mistakes, with disastrous
consequences. Understanding the choices to be made and the technological
forces underlying them is, at this stage, critical for continued
economic success.
Notes for Editors:
CEPR is a network of over 450 Research Fellows based
throughout Europe, who collaborate through the Centre in research and
its dissemination. CEPR helps its Research Fellows to develop projects,
obtain their funding, administer them and disseminate their results. The
Centre’s research ranges from open economy macroeconomics to trade
policy, from the economic transformation of Central and Eastern Europe
to regionalism in the world economy. The views expressed in the briefing
are the author’s own. CEPR is an ESRC Resource Centre. For further
information about CEPR, please contact Rita Gilbert, External Relations
Officer, Tel 44 20 7878 2917, Fax 44 20 7878 2999 or by email on rgilbert@cepr.org.
Studieförbundet Näringsliv och Samhälle (SNS)
was established in 1948 as an independent forum for the free exchange of
ideas on economic and social issues among individuals in the private
sector, policy community and the media in Sweden. it currently has
approximately 4,000 individual members and150 corporate subscribers,
including most of Sweden’s largest corporations in the private and
public sectors. SNS is
not affiliated with any political parties or interest groups, but
maintains a close relationship with the Swedish academic community and
with organizations and research institutes in other countries. SNS
carries out academic research, issues a variety of policy studies and
other publications and organizes seminars and conferences.
Danny Quah is Professor of Economics at the London School of
Economics, and a Research Fellow in CEPR’s International
Macroeconomics programme. He is also a Research Fellow at the Centre for
Economic Performance based at the London School of Economics.
‘Technology in Growth’
CEPR Discussion Paper
No. 1901
Louise C Keely and Danny Quah
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